August 24, 2016

Despite calls for collaboration, truck shippers seen sticking to the same old script

For shippers, extending themselves to their carriers only goes so far—if it goes anywhere at all.

By Mark B. Solomon

In recent years, trucking executives have been preaching to shippers the virtues of a more collaborative relationship to help supply chains run more efficiently and to provide relief to their hard-pressed drivers. The attempts at friendly persuasion have often been accompanied by a not-so-subtle message: Those who co-operate will have capacity available to them at competitive prices during periods of tight supply, while those who don't may get left by the side of the road.

The pleas and warnings have mostly fallen on deaf ears, however.

Indeed, there are shippers that extend themselves for their carriers because they think that it's the right thing to do, and that some degree of behavior modification makes good business sense. Yet there remains a large body of shippers that have not changed their ways, knowing that with so-so freight demand and with capacity quite ample, they can continue to behave in their own best interests and still find wheels at good rates.

Tom Sanderson, CEO of Transplace, a large Dallas-based third-party logistics (3PL) provider, sees the landscape more clearly than most, and he's blunt about the current climate. "The shipper is in control," Sanderson said in a recent phone interview. Shippers willing to work with carriers in a loose capacity environment are doing so because they believe in operating in an equitable setting, he said. They are also buying capacity protection for when the next tightening cycle occurs, he added.

Efforts to force behavioral changes on shippers have largely been fruitless, said Charles W. Clowdis Jr., managing director-transportation, Economics & Country Risk, for consultancy IHS Markit, who has spent decades as a trucking executive and consultant. "We've been telling shippers for years to make themselves trucker-friendly, to treat the drivers well, and to be on time," Clowdis said in an e-mail. Most shippers ignore the advice, he said. "They just push for lower rates and better service."

It is difficult, if not impossible, to quantify the impact of shipper behavior. Perhaps the closest measure comes from a monthly index of truckload line-haul rates published by audit and payment firm Cass Information Systems Inc. and investment firm Avondale Partners LLC. The index in July fell 1.6 percent year over year, the fifth consecutive month of year-over-year declines, the firms reported. Avondale analysts predict that comparable pricing will stay in a range of 3 percent to 1 percent for the rest of 2016. The weakness in core line-haul pricing reflects a combination of sluggish demand and overcapacity that suppresses rate growth and keeps shippers in a position of leverage.

Geoff Turner, president and CEO of Preston, Md.-based Choptank Transport Inc., a large broker, said he sees shippers playing on both sides of the action. Some shippers stick to the rates they've contractually agreed to even though they can price their loads cheaper on the spot, or noncontractual, market, Turner said in an e-mail. In turn, they expect Choptank to honor its capacity commitments if and when supply shrinks, he added.

However, there are customers "playing the rate game, passing freight out to the cheapest rate of the day-with no regard to long-term implications," Turner said. Those customers are enjoying the short-term fruits of lower rates, but will pay for it significantly when the capacity worm turns, he added.

Capacity tightness short-lived

The worm hasn't done much turning in the past dozen or so years. Capacity tightened considerably in 2004-05 as construction boomed in concert with the demand for residential and commercial real estate development. It tightened again in 2014, but that was largely due to capacity dislocations caused by the paralyzing winter of 2013-14, when many carriers couldn't meet their commitments and shippers were forced to turn to the spot market for service. Other than those two periods, which were not triggered by what would be considered normal and sustainable economic growth, shippers have been in the driver's seat.

"Concerns about driver shortages have been omnipresent, but those periods of prolonged tightness have been fleeting over the past 15 years," said Benjamin J. Hartford, transport analyst for Robert W. Baird & Co. Inc., an investment firm.

Hartford and others believe the long-term supply picture will continue to deteriorate as the driver workforce ages, fewer applicants enter the field, and regulatory compliance issues take truckers off the road. The most visible regulatory challenge is the federal government's requirement that all fleets be equipped with electronic logging devices (ELDs) by the end of next year.

If upheld in court, the ELD mandate is expected by many to cause significant attrition, as the owner-operators that are the backbone of the nation's truck fleet find the costs and the alleged invasion of their privacy to be too onerous and leave the business. However, the trade group representing owner-operators—which succeeded once already in turning back the mandate—has challenged it again, this time on constitutional grounds. Should the group prevail—and several observers consider it a long shot—capacity-tightening concerns would likely be shelved for the near term.

Meanwhile, several 3PLs, acting on behalf of shippers, have developed "scorecards" to rate the performance and behavior of shippers and carriers. Transplace, for one, has rated a handful of big shippers in its managed-transportation unit by gauging their behavior through the eyes of their carriers, according to Sanderson. Shippers scored the best in minimizing driver waiting times at loading and unloading docks, and for prompt carrier payments, Sanderson said.

Large 3PLs are building scorecards that evaluate shippers and carriers at the same time, said Ken Harper, director of marketing at DAT Solutions LLC, a consultancy. He said there are financial incentives for shippers to be rated a "shipper of choice" and for carriers to be designated a "carrier of choice," but he did not elaborate.

Harper added that the scorecard process, which had been used to analyze contractual relationships, is expanding into the spot market, with brokers rating their carriers. Though it may seem unusual to drill down into what is a purely transactional relationship, the spot market's growing relevance—more than one-quarter of truckload freight moves this way—means that brokers will be using the same carriers multiple times and want to gain insight into the needs of shippers buying on the spot market.

For his part, Harper believes that the days of the large, publicly traded carriers getting beat down on rates are largely over. "According to our data, contract rates are starting to rise as carriers cherry pick the routes and dump the unprofitable freight onto the spot market," he said in an e-mail.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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